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November
23, 2007
Mortgage
Crisis
name='1'>Study Predicts $300 Billion in Write Offs Due to Mortgage
Downturn
The Organization for
Economic Cooperation and Development (OECD) released a report yesterday
predicting that losses in the distressed mortgage sector of the
size='3'>United States
size='3'>could reach $300 billion, the
size='3'>New York Times reported today. Major
financial institutions, including Citigroup, Merrill Lynch and Swiss Re,
have estimated losses of about $50 billion, but the OECD cautioned that
a rougher period may yet await financial markets, which have swooned in
recent days as traders try to calculate the impact of mortgage-sector
losses on the overall economy. The group
estimated the losses based on a 14 percent default rate on subprime
mortgages, high by historical standards but entirely plausible under the
current circumstances, economists say. Losses on subprime loans would
cost lenders $125 billion, the organization said. Factoring in so-called
Alt-A mortgages, OECD concluded that an overall loss level of $300
billion was possible.
href='http://www.nytimes.com/2007/11/23/business/23oecd.html?ref=business&pagewanted=print'>Read
more.
href='http://www.oecd.org/dataoecd/53/18/39654572.pdf'>Click here to
read an overview of OECD’s report.
name='2'>Freddie Mac Faces Shareholder Lawsuit over
Losses
One day after reporting a
$2 billion quarterly loss, Freddie Mac found itself the target of a
shareholder lawsuit accusing the mortgage-funding giant of misleading
investors about its risk-management practices, the
face='Times New Roman' size='3'>Washington Post
size='3'>reported today. The lawsuit in a
w:st='on'>
size='3'>Manhattan
court seeks damages on behalf of investors, and it comes after a formal
investigation by New York State Attorney General Andrew M. Cuomo into
loan appraisals for banks that sold mortgages to Freddie Mac and its
larger rival Fannie Mae.
size='3'>The suit filed by the law firm of Coughlin Stoia Geller Rudman
& Robbins alleges that Freddie Mac 'made false and misleading
statements concerning . . . its risk management and the procedures it
put in place to protect the company from problems in the mortgage
industry.' Cuomo earlier this month issued subpoenas to Fannie Mae and
Freddie Mac and demanded that they appoint independent examiners to
review appraisals on the loans they purchased from banks. The attorney
general's subpoenas also seek information on the due diligence performed
by Fannie Mae and Freddie Mac and their evaluations of
appraisals.
href='http://www.washingtonpost.com/wp-dyn/content/article/2007/11/21/AR2007112102335.html'>Read
more.
name='3'>Tenants Pay as Landlords Default
As
size='3'>U.S.
soar, renters - especially in small apartment buildings and
single-family homes - are paying a high price for their landlords'
financial troubles as thousands of people are being evicted across
the
face='Times New Roman' size='3'>United
States
the Wall Street
Journal reported today. Unlike larger
apartment buildings owned by commercial enterprises, homes and small
multifamily properties typically aren't run by management companies.
Banks, which aren't equipped to handle utility and water bills,
maintenance and insurance requirements, want to sell foreclosed property
as soon as possible, and often that means getting rid of the tenants.
The U.S. House of Representatives recently passed legislation that would
require new owners to honor leases of tenants for as long as six months
after foreclosure.
href='http://online.wsj.com/article/SB119577799439601624.html?mod=hpp_us_whats_news'>Read
more. (Registration required.)
name='4'>GMAC Explores Options for ResCap
GMAC Financial Services
and its owners are exploring options to salvage its unprofitable
mortgage arm, and they are undertaking a debt buyback of as much as $750
million, with a long-term eye to the industry's recovery, the
Wall Street Journal
reported today. The moves by GMAC, the home and auto
lender owned by private-equity concern Cerberus Capital Management LP
and General Motors Corp., are aimed at shoring up Residential Capital
LLC, known as ResCap. The housing-market crunch put ResCap's
third-quarter results deeply in the red, posing tough questions for
Cerberus and driving down GM's share price. The moves show that GMAC,
Cerberus and GM are willing to take a long-term view of the mortgage
business, which once was a big profit source for GMAC. They also could
set the stage for the acquisition of a distressed competitor,
size='3'>United Kingdom
size='3'>home lender Northern Rock, which GMAC and Cerberus have been
competing to acquire.
href='http://online.wsj.com/article/SB119566898703300785.html?mod=hpp_us_whats_news'>Read
more. (Registration required.)
name='5'>Commentary: Banks Gone Wild
Even as the current slump
being experienced by large banks due to t the
w:st='on'>
size='3'>U.S.
size='3'>housing market crisis was both predictable and predicted, Wall
Street piled into bonds backed by dubious home mortgages, according to a
commentary in today’s
size='3'>New York Times. Most of the bad
investments now shaking the financial world seem to have been made in
the final frenzy of the housing bubble, or even after the bubble began
to deflate. In fact, according to
size='3'>Fortune
size='3'>Magazine, Merrill Lynch made its
biggest purchases of bad debt in the first half of this year —
after the subprime crisis had already become public knowledge. The
losses suffered by shareholders in Merrill, Citigroup, Bear Stearns and
so on are the least of it. Far more important in human terms are the
hundreds of thousands if not millions of American families lured into
mortgage deals they didn’t understand, who now face sharp
increases in their payments — and, in many cases, the loss of
their houses — as their interest rates reset. Part of the answer
as to how things went wrong lies with the people who should have been
alert to the dangers, and taken precautionary measures, instead blithely
assured Americans that everything was fine, and even encouraged them to
take out risky mortgages. Another is the lack of corporate governance
for the leaders of the banks and lenders, who have continued to profit
with hefty compensation packages despite the large losses experience by
their respective companies.
href='http://www.nytimes.com/2007/11/23/opinion/23krugman.html?ref=opinion&pagewanted=print'>Read
more.
to Seek Further Support for Credit Market Superfund
Bank of America Corp.,
Citigroup Inc. and J.P. Morgan Chase & Co., who have been assembling
a plan aimed at thawing credit markets, are expected next week to start
soliciting their industry brethren to pitch in with the effort,
the Wall Street
Journal reported today. The move will be a
significant step in forming the so-called superfund that has been in the
works since September. It is aimed at providing an alternative for
off-balance-sheet entities called structured investment vehicles (SIVs)
that have run into trouble amid a lack of liquidity in credit markets.
The fund will create a potential buyer for SIV assets. SIV managers
won't be required to sell assets into the fund, which will only buy
high-quality assets in an attempt to maintain investor confidence in the
fund. Bankers
involved in assembling the plan have said they would like to get the
superfund running by January.
href='http://online.wsj.com/article/SB119577885324101647.html?mod=hpp_us_whats_news'>Read
more. (Registration required.)
Joan
Fabrics Bankruptcy Converted to Chapter 7
Bankruptcy Judge
size='3'>Chris
size='3'>topher S. Sontchi approved Joan
Fabrics Corp.'s request to convert its chapter 11 bankruptcy case to a
chapter 7 liquidation, the Associated Press reported on Wednesday. The
conversion became necessary after lenders refused to allow the company's
further use of their cash collateral, Joan Fabrics said in court papers.
The company said that its ability to tap the lenders' cash collateral
expired Oct. 28, leaving it with only about $2.88 million on hand. Joan
Fabrics, of
size='3'>Tyngsborough,
size='3'>Mass.
on April 10, blaming a 'significant downturn' in the
size='3'>U.S.
industry fueled by competition from
w:st='on'>
size='3'>China
size='3'>and other countries.
href='http://biz.yahoo.com/ap/071121/joan_fabrics_bankruptcy.html?.v=1'>Read
more.
name='8'>Northwest Objects to $20 Million Claim
Northwest Airlines asked
the U.S. Bankruptcy Court for the Southern District of New York on Nov.
20 to disallow and expunge a $20 million claim filed by Mitsui & Co.
and U.S. Bank N.A. over the lease for an Airbus A320-212
aircraft, Bankruptcy
Law360 reported on Wednesday. The carrier has
also argued that the amount of the claim has not been verified, calling
the $20 million figure “unsubstantiated by appropriate
documentation or other evidence.” The bank and the aircraft owner
argued that their claim is comprised of $169,051.15 in unpaid
prepetition rent and accrued interest, $45,226.99 in unpaid
post-petition rent and accrued interest, $19,871,911.76 in stipulated
loss value and $54,208.57 in attorney’s fees.
href='http://bankruptcy.law360.com/Secure/ViewArticle.aspx?id=40728'>Read
more. (Registration required.)
name='9'>Nursing Home Company Declares Bankruptcy
A nursing home company
declared bankruptcy amid allegations of poor care and state inquiry into
whether it illegally used federal funds meant for patients for other
purposes, the Associated Press reported on Wednesday. Middletown,
Conn.-based Haven Healthcare Corporation filed for chapter 11 on Tuesday
in
size='3'>New Haven
size='3'>bankruptcy court, asking for protection from the tens of
millions of dollars it owes creditors while it restructures. The company
operates more than 40 health-related companies in
w:st='on'>New
England
clinic and medical supplies. The company's largest debt listed in the
bankruptcy documents is $13.7 million owed to Kentucky-based Omnicare
Value Health Care, which provides pharmaceutical care to the elderly.
In
size='3'>Connecticut, the
company owes the state tax department nearly $600,000.
href='http://biz.yahoo.com/ap/071121/ct_nursing_home_troubles.html?.v=1'>Read
more.
name='10'>Calpine Rejects Leases and Sales Contracts
Bankrupt energy company
Calpine Corp. received approval to reject a handful of unexpired leases
and contracts, including several steam and water sales deals, after
determining that ending the agreements would be in the best interest of
the company's reorganization,
size='3'>Bankruptcy Law360 reported on
Wednesday. Bankruptcy Judge Burton R. Lifland approved
Calpine's motion to toss the contracts in December 2005 and the company
determined on Nov. 20 that ending the deals would benefit the company
and filed a formal motion notifying the involved parties. Rejected
leases and contracts include water, steam and compressed air sales
agreements with the Oklahoma Ordinance Works Authority, a thermal energy
sales deal with Protein Technologies International, and an
interconnection agreement reached with the Public Service Company
of
size='3'>Oklahoma
parties affected by the contract rejections have 10 days from the date
they are served the notice of rejection to file an appeal with the
bankruptcy court.
href='http://bankruptcy.law360.com/secure/ViewArticle.aspx?Id=40724'>Read
more. (Registration required.)
name='11'>Insurers Shift Cost Burdens to Homeowners
American homeowners are
having to make do with much less insurance coverage at as insurance
prices have skyrocketed along coastal and other areas of the country,
the New York
Times reported today. The insurers say that
they have had to take defensive measures to stay in business and pay
claims as operating costs have climbed. However, some industry experts
and consumer advocates say that efforts by the insurers to increase
profits, after years of taking losses on home insurance, are shifting
more of the burden of repairs and reconstruction to homeowners. The
cutbacks in coverage, consumer advocates say, have contributed to the
slow recovery of the
size='3'>Gulf
face='Times New Roman' size='3'>Coast
size='3'>from Hurricane Katrina and will most likely hamper recovery
from the recent wildfires in
w:st='on'>
size='3'>California. The
advocates point to the steadily improving bottom lines of the insurance
companies. The property insurance industry, including home, auto and
commercial coverages, reported a record profit of $44 billion in 2005,
even after paying $41 billion in damages from Katrina. The industry set
another record for profit in 2006 at $64 billion.
href='http://www.nytimes.com/2007/11/23/business/23insure.html?_r=1&oref=slogin&ref=business&pagewanted=print'>Read
more.
href='http://www.nytimes.com/2007/11/23/business/23insure.html?_r=1&oref=slogin&ref=business&pagewanted=print'>